Whatever your retirement dreams are, they can still come true. It just depends on how you plan and manage your resources. On any trip, it helps to have an idea of where you’re going, how you plan to travel, and what you want to do when you get there.
If this sounds like a vacation, well, it should be. Most people spend more time planning a vacation than something like retirement. And if you think of retirement as the next act in your life and approach it properly, you won’t get bored so easily, run out of money to continue the journey, or get lost and make poor financial decisions along the way.
It’s how you manage it that counts
How much you really need depends on the lifestyle you hope to have. And it’s not necessarily true that your expenses will go down in retirement. Assuming you have an idea of what your annual expenses might be in today’s dollars, you now have a goal to aim for in your planning and investing.
Add up the income from the sources you expect in retirement. This can include Social Security benefits (the system is solvent for at least 25 years), any pensions (if you’re lucky enough to have an employer-sponsored plan), and any income from jobs or that new career.
Endowment expenses: imagine you are like Harvard or Yale
Consider taking the same approach that keeps large organizations and environments running. They plan to be around for a long time, so they aim for a spending rate that allows the organization to sustain itself.
1.Calculate your gap– Take your budget, subtract the expected income sources and use the result as your goal for your withdrawals. Keep this number to no more than 4%-5% of your total investment portfolio.
two.Use a blended approach: Each year look to increase or decrease your withdrawals based on 90% of the prior year’s rate and 10% of the return on the investment portfolio. If it goes up, you get a raise. If investment values go down, you have to tighten your belt. This works well in times of inflation to help you maintain your lifestyle.
3. stay invested: You may be tempted to leave the stock market. But despite the rollercoaster ride we’ve had, it’s still wise to have a portion allocated to equities. Keeping in mind that people live longer, you may want to use this rule of thumb for your stock allocation: 128 minus your age. Regardless, you really should keep at least 30% of your investment portfolio (not including safety net money) in stocks.
If you think the stock market is scary because it’s prone to periods of wild swings, consider the risk that inflation will have on your purchasing power. Historically, bonds and CDs alone don’t keep pace with inflation. Only stock investments have demonstrated this ability.
Aim to invest smart. While asset allocation makes sense, it doesn’t have to be married to “buy and hold” and agree to be bounced around like a yo-yo. Your primary allocation can be supplemented by more tactical or defensive investments. And you can change the combination of actions to cushion the effects of the roller coaster. Consider including shares of large companies that pay dividends. And add asset classes that aren’t tied to the ups and downs of major market indices. These alternatives will change over time, but the defensive ring around their core needs to be reassessed from time to time to add things like commodities (oil, agricultural products), commodity producers (mining companies), distribution companies (pipelines), convertible bonds and managed futures. .
Four.Invest for income: Don’t just trust bonds that have their own set of risks compared to stocks. (Think about the risk of a credit default or the impact of higher interest rates on the fixed income coupon of your bond.)
Combine your bond holdings to take advantage of the features of the different types of bonds. To protect yourself against the negative impact of higher interest rates, consider floating-rate corporate notes or a mutual fund that includes them. By adding high-yield bonds to the mix, you’ll also provide some protection against eventual higher interest rates. Although they are called junk bonds for a reason, they may not actually be as risky as other bonds. Add Treasury Inflation-Protected Securities (TIPS) that are backed by the full faith and credit of the US government. Add emerging country bonds. While there is currency risk, many of these countries do not have the same structural deficits or economic problems as the US and developed countries. Many learned their lesson from the debt crisis of the late 1990s and did not invest in the exotic bonds created by financial engineers on Wall Street.
Include dividend-paying stocks or stock mutual funds in your mix. Large foreign companies are great sources of dividends. Unlike the US, there are more companies in Europe that tend to pay dividends. And they pay monthly instead of quarterly like here in the US Balance this with hybrid investments like convertible bonds that pay interest and offer upward appreciation.
5. Build a safety net: To get a good night’s sleep, use a bucket approach by dipping into the investment bucket to replenish the reserve that should have 2 years of near-cash investment spending: savings, tiered CDs, and fixed annuities.
Yes, I said annuities. This safety net is backed by three legs, so you’re not putting all your eggs in annuities, let alone a term annuity. For many this may be a dirty word. But the best way to get a good night’s sleep is to know that your “must-haves” are covered. You can get relatively low-cost fixed annuities without all the bells, whistles, and complexity of other annuity types. (Although tempting, I’d tend to pass up “bonus” annuities because of the long schedule of surrender charges.) You can stagger your terms (1 year, 2 years, 3 years and 5 years) just like CDs. To minimize exposure to any one insurer, you should also consider spreading them across more than one well-rated insurance company.